Investors are being lured into crazy e-commerce schemes, again. And they are losing their shirts, again.
Last week, Blue Apron (APRN) reported financial results in its first quarter as a public company.
It was a dumpster fire. Big losses everywhere, weaker guidance, rising labor costs. The stock is down 50% since July.
Wall Street pitchmen are making a killing, though. They always do.
They pitched Blue Apron as a technology company. That’s generous.
The New York City-based company markets, packages and ships uncooked meals to customers. That’s it.
The website is full of exotic-sounding dishes like “Cod & Fairy Tale Eggplants”.
Order it and you’ll get portioned pearl couscous, yellow tomatoes, raisins, almonds and petite eggplants. Follow the step-by-step instructions … and voila, you’re an Iron Chef … or at least worthy of a Scout merit badge.
Blue Apron does lots of the hard work, like figuring out recipes and shopping for ingredients, both common and gourmet. It can even provide a wine pairing. And there’s a smartphone app, too.
Does that make it a technology company? Not in my book. It reminds me of Pets.com.
Back in the dot-com era, the online pet-supplies company secured a bunch of venture capital. And it received Wall Street’s blessing as the next great tech company, Nasdaq symbol IPET.
It had a cute sock-puppet mascot, Super Bowl ads and a website. That was supposed to be enough to dominate the pet-supplies business.
It wasn’t.
Pets.com couldn’t make a go of things no matter how much money it spent on marketing. Bags of dog food are very heavy, and cost a ton to ship.
Blue Apron is in the same boat.
Last year it spent $143 million flogging its website. That’s 18% of its $795.4 million in sales. It did help grow the business, and it attracted the Wall Street pitchmen.
In the first quarter, it cut marketing to only $20 million. That led to 100,000 fewer customers. And that’s going to leave a mark.
According to reporting from CNBC, Blue Apron told analysts to expect a loss of $121 million to $128 million in the second half. Revenues are expected to fall to a range of $380 million to $400 million. And the company plans to cut marketing even further going forward as it bleeds cash.
To add insult to injury, days after Blue Apron’s IPO, Amazon (AMZN) announced it was getting into the same business.
The online giant calls its grocery ordering and delivery service Amazon Fresh. But the idea is the same. It will box up portioned ingredients, and ship the box to your doorstep.
And, while the market for these meal kits is growing, it really is small potatoes for Amazon. It could crush a cash-strapped Blue Apron as it seeks market share.
However, it’s not like institutional investors didn’t see this coming.
The offering was initially set to price at $15. However, demand was so weak that the lead underwriters – Goldman Sachs (GS), Citigroup (C) and Morgan Stanley (MS) – cut the price to $10. The deal ultimately raised $100 million.
That’s when the facade of Blue Apron as a technology titan began to fall. It held no technological advantages. No fancy algorithms. No patents to discourage competitors. It was defenseless.
Except, for Wall Street.
With the stock trading at $6 in July, Goldman, Morgan Stanley and others reiterated “Buy” ratings and $10-to-$11 price targets for retail investors.
Jason Helfstein at Oppenheimer claimed the addressable market for meal kits was an astronomical $524 billion. He opined that the market’s size meant there would be many winners – despite growing competition from Amazon and others.
Two weeks later, he downgraded Blue Apron to “Perform” and removed his price target altogether. Even worse for APRN, Morgan Stanley argued the high churn rates at Blue Apron could lead to more subscriber weakness.
Morgan Stanley set a price target at $5. And the stock sits not far from that level.
Funny thing is, some investment bankers were originally trying to pitch the stock to the public for three-times that. They had roadshows, slide decks, the works. The business was supposed to be well-positioned to dominate a giant market.
You know, like Pets.com.
And that is the bottom line. Finding great stocks that beat the market year-after-year is hard work. It’s a service I take very seriously.
Wall Street doesn’t care about you. It loves a good story that can be sold. Retail investors are too often played as dupes.
The moral of the story, which I have explained many times:
The business of Wall Street is selling securities, not making you wealthy. But with cunning and patience, you can beat the Street at its own game.
Best wishes,
Jon Markman
